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Issue 37
Feature Article: Economics of the Housing Sector
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Feature Article: Economics of the Housing Sector
Young Group
Stripping the housing market back to its micro-economic fundamentals, putting aside projections and predictions regarding the future impact of the credit crunch, the fact remains that the sector is driven - or hampered - by the interaction of supply and demand.
In simple terms, it can be argued that the lack of readily accessible mortgage funds choked demand from prospective buyers to such a severe extent that it resulted in a reduction in house prices. There just wasn't the demand from buyers to sustain the prevailing price levels.
Contracting Demand Results in a Fall in Prices
Pent up demand
But taking a forward view, the Government maintains that its long term target for housebuilding of almost two million new homes being built by 2016 remains relevant. Clearly the Government believes that there is an inherent demand for housing which, at the moment, is constrained both by a lack of access to mortgages and by prospective purchasers who are 'sitting tight' and 'waiting to see what happens' - in the hope that they will be able to snap up a bargain at the bottom of the market.
It is impossible to predict the level of this pent up demand, but the Office for National Statistics ONS expects the UK population to swell by 6% to 65m between 2006 and 2016. The population of London alone is expected to grow to 7.9m by 2016 and the number of households (currently increasing at a rate of 26,000 each year) will stand at 3.5m, all of which will create upward pressure on house prices (Source: GLA).
Growing Demand Results in Increasing Prices
Constrained Supply
Further upward pressure on prices is likely to be seen as result of a shortage in the supply of property. It is already apparent that the supply of new homes was way behind demand prior to the credit crunch - hence the Government's housebuilding targets – and things have worsened since then. Developers have not only seen a fall in demand and prices for the new homes that they've built, but they have also found it increasingly difficult to secure bank funding to build new housing projects, dramatically reducing the number of new homes being built.
Contracting Supply Results in an Increase in Prices
Figures from the ONS show that new orders for private housing fell by 58% during the quarter to December 2008 compared to the same quarter in 2007, representing the largest quarterly drop in the history of new orders figures for private housing. There was a similar trend in the public housing and housing association sectors, with orders dropping by almost 60% during 2008. Noble Francis, Economics Director at the Construction Products Association (CPA) explained, “The construction industry was hoping that increased spending for public housing would begin to come through to offset the sharp fall in private sector housing, in line with recent government announcements. Sadly, the ONS figures indicate this is unlikely to occur in the near future, even though the industry is crying out for positive government action.” Similar evidence is reported by the Royal Institution of Chartered Surveyors (RICS), the number of new housing starts in 2008 was around 110,000 – a figure well below those recorded during the last recession in the early 1990s and less than half of the Government's target of 240,000 new homes per year.
The situation is not expected to improve quickly. The RICS's projection for 2009 is even worse: output expectations have dropped to a new low suggesting that housing starts this year could be as few as 80,000. A similar picture is painted by the CPA which warns that the construction industry is set for its biggest decline in 30 years. The association predicts output to fall by 9% in 2009 and by a further 4% in 2010 – a greater drop than at any time since the early 1980s.
Furthermore, the UK is not predicted to see a recovery in total construction output until 2012 and the number of housing starts – both private and public – is expected to fall to the lowest level since 1924.
There is a lag in delivery of new homes and even for housing projects of modest scale, the time period from starting the planning process to finished homes being ready to move into can typically be anything from 18 months to two years, further prolonging the effects of constrained housing supply. The persisting shortfall, coupled with a release of pent up demand could fuel yet another property bubble in a few years time.
Persisting supply problems
During the last recession in the 1990s, construction output did not recover from its 1990 peak until 2001, due, in part, to the construction industry being 'decimated' as skilled workers had left the industry and retrained into other sectors (Source: Experian Business Strategies).
There are currently concerns that the industry could be similarly affected again. Building Magazine this month reported that the UK construction industry was hit by 48,000 redundancies in the three months to December 2008. Government figures show this to be a rise of 50% on the previous quarter when 31,000 people lost their jobs. The figure was almost five times higher than for the same three month period in 2007, when there were 10,000 redundancies. The impact on the sector is not confined to construction companies and contractors. The CPA points out, “There have been at least 50,000 job losses in the construction products industry in the last year, representing between 7.5% and 8% of the estimated total workforce, and we expect further reductions.”
The Construction Skills Network has referred to this loss of skills as a 'ticking time bomb' and predicts that the sector's workforce will not recover to 2008's level of 2.6m until 2013.
A new equilibrium
Exactly when property prices will start rising again is a difficult question to answer, but it would seem that we are now moving out of the initial phase of the downturn, which was characterised by low demand and robust supply, to an environment where both demand and supply are low which is likely to give some support to house prices. This phase is likely to be followed by a market situation where demand is increasing and supply is low.
The Combined Effect of Contracting Supply and Increasing Demand
During the course of 2009 it is likely that cash-rich buyers, particularly Euro and dollar purchasers who can take advantage of the weak pound, will be looking to pick up bargains, primarily in central London. However, the mainstream market will take longer to recover – the timescale is dependent to a large extent on the persistence of the credit crunch and availability of finance – both mortgages for purchasers and loans for developers.
Owner Occupiers Have an Eye on the Bottom of the Market
Owner occupiers are said to be returning to the housing market looking for bargains according to newly released research from the Royal Institution of Chartered Surveyors (RICS). The report indicated that many potential purchasers believe that the market has reached the bottom, although it also confirmed that first time buyers are still being denied access to the property ladder as a result of restrictive mortgage lending. Following three successive monthly increases in the RICS new buyer enquiry series, the RICS has asked further questions of its members to determine what is underpinning this sustained increase in interest. 71% of Chartered Surveyors stated that lower house prices were responsible for the growth in enquires while 48% believed that buyers are increasingly convinced that the bottom of the market is in sight. Only 35% of surveyors believe that lower mortgage rates are tempting buyers. Meanwhile, just 15% referred to positive personal circumstances overwhelming negative macro concerns.
74% of Chartered Surveyors reported that it is existing owner occupiers who are driving the renewed level of interest and 38% indicated that investors are looking to acquire new properties. However, only 23% of surveyors thought that first-time buyers are a driving factor in the current market. Interestingly, almost one in ten respondents suggested that overseas buyers were now looking for opportunities in the UK residential market, benefiting as they are, from favourable currency exchange rates.
Meanwhile, the National Association of Estate Agents (NAEA) commented, “It is too early to say whether this increase in property prices will continue, but it reflects that in certain areas the downturn is slowing and hopefully beginning to bottom out.
“What is clear is that if confidence is returning to the market in any form, it is the job of the Government and the major lenders to try responsibly to sustain it. The NAEA believes that a complete suspension of stamp duty from the Government, and increased availability of mortgages from the banks, would achieve this.”
Viewing Numbers Lift Housebuilding Shares
The Financial Times this month highlighted that positive reports of increased property viewings during January led to a rallying of housebuilder shares.
Bank of England Indicates Increase in Mortgage Approvals
Latest figures from the Bank of England indicate that the number of new mortgages approved during the month of December increased to 31,000, up from an all time low of 27,000 for the month of November. Mortgage lending for 2008 as a whole was down 58% on the previous year with only 519,000 approved.
Similarly, the British Bankers Association reported an identical trend. Mortgage approvals for house purchases rose slightly in December to a little over 22,000 from a record low in November of 17,000.
Quantative Easing to Combat Inflation
Inflation in the UK has fallen substantially in recent months. The consumer price index, which is the measure targeted by the Bank of England, fell from a peak of 5.2% in September last year to 3.1% in December 2008, and further to 3.0% in January this year. But the Bank of England's deputy governor has mounted a robust defence of its preparations for creating money to buy government bonds, which it is hoped will prevent inflation from falling too far below the Treasury's 2.0% target. Charlie Bean said “Some parts of the press had described the policy – the technical term for which is 'quantitative easing' – as 'printing money', linking it with the spectre of national bankruptcy”. He insisted the measure would be limited to increasing the rate of growth of the supply of money and credit.
Base Rate Cuts Reduce Average Mortgage by 24%
The Bank of England's decision to cut the official bank rate from 5% in September to 2% in December led to lower mortgage rates. As a result, The Office for National Statistics estimates that the average mortgage interest payment fell by 24% between September and December which had the effect of reducing the inflation rate, as measured by the retail prices index, by 1.5 percentage points. Base rate was cut by a further half a percent this month to just 1.0%.
Vulture Funds Eye Bargains
A poll of 100 investor funds by Financial Times Group owned Debtwire indicates that vulture funds will be eyeing the UK for bargains during 2009. The UK was ranked top for offering the best investment opportunities in Europe this year, ahead of France, Germany and Russia by the poll of European and US hedge funds, proprietary trading desks of banks and private equity investors.
Polarisation of the Private Rented Sector
According to Business Development Research Consultants' (BDRC) latest 'State of the Nation Review of the Buy-to-Let and Private Rented Market' on behalf of the British Property Federation (BPF), the economic downturn has polarised the rental sector. A clear divide has been created between profit-making professional landlords, who typically have larger portfolios and remain largely unaffected, and severely strained amateur landlords who are now battling the effects of the credit crunch.
The research surveyed more than 500 British landlords and has found that 100% of professional landlords are making a profit, thanks in part to falling interest rates, and many are taking advantage of lower property prices to add to their portfolios. Mark Long, client services director at BDRC commented; “while professional landlords are able to cover their costs and expand their portfolios, the amateur landlords, many of whom fell into letting by accident, are really starting to feel the pinch.”
BPF Urges Treasury to Support Professional Rented Sector
A professional, branded private rented sector 'could be the answer to Britain's woes', according to the British Property Federation (BPF). In a bid to encourage private companies to invest in the rental market, the BPF is lobbying for changes to stamp duty for purchasers of portfolios or multiple properties, recognition of rental developments through the planning process (in light of their different financing model from schemes destined for owner occupation), and also reinstatement of the system of direct payment of local housing allowances to landlords. Ian Fletcher, BPF residential director, commented; “Over the past decade the private rented sector has proved itself invaluable. It has facilitated the rapid expansion of higher education, housed those unable to find any other home and supported the UK's flexible labour market. The sector's ability to adapt has been a huge strength and one that the government should be harnessing.”
Across Europe an average of 37% of a country's homes are rented properties. In Germany 55% of households live in rented accommodation; in Austria the level is 49% and in the Netherlands 45% of homes are rental properties. In the UK the amount is 31%.
A Vision of 2012 in 2040
Olympics chiefs have released images of how they hope a regenerated Stratford will look in 2040 as Mayor Boris Johnson published the proposals for the 500 acre site. Locals will be consulted over plans to add 7 schools and 10,000 houses to the sports venues which will remain after the Games creating 10,000 new jobs. The £547m Olympic Stadium will be reduced in capacity from 80,000 to 27,000 after the Games and will primarily operate as an athletics venue.
The English Institute of Sport, experts in sports science, and a new National Skills Academy for sports and leisure industries will set up offices at the stadium.
The other major new venues - the aquatics centre and velodrome - will be used by schools and local sports clubs. The LDA will hand over the task of bringing in private investors to a legacy company which will be formed this year. Mr Johnson said: “One of my main concerns was always the lack of a clear vision for the legacy that would be left for East London from the huge investment we were making. Now I believe that the future for this most deprived area is spectacularly bright.”
Kings Cross Station Redevelopment Steams a Step Closer
Network Rail has announced a shortlist of six teams for the £6m redesign of Kings Cross Station as part of the rail infrastructure operator's £450m programme of station redevelopments.
The plans will add an additional station platform, boosting annual passenger capacity from 40 million to 50 million and will also incorporate a public station approach that is larger than Leicester Square and the reinstatement of Lewis Cubitt's 1851 historic Grade I listed southern station facade. The redevelopment will be complete by 2013.
LandSec's £1billion Victoria Transport Plans Get Green Light
Westminster council has given the go-ahead for the long awaited Victoria Transport Interchange scheme after taking into account the schemes viability. Despite the third iteration of the proposals falling short of its minimum threshold for affordable housing and transport contributions, the council took into account the “social, economic and transport benefits” of the scheme in granting planning consent. The council noted that the viability of the project was so finely balanced that imposing any further costs would prevent the scheme from being built.
The five new buildings close to Victoria station will provide 110,000 sq ft of new retail space, 600,000 sq ft of offices, 170 private homes, 35 affordable residential units and a new library, as well as a face-lift to the Victoria Palace Theatre.
Southwark Approves Aylesbury Estate Plans at E&C
After almost 10 years, the final details for the £2.5bn regeneration of the historic Aylesbury Estate in Elephant & Castle have been signed off by Southwark Council. The plans will see the majority of the existing 70 acre hi-rise site demolished and replaced with 5,000 new properties over the next 15 to 20 years. The first phase will comprise 260 new homes, retail space and a new community resource centre.
Funding Confirmed for London Orbital Rail Link
Government ministers and Transport for London have agreed funding for an extension to the East London Underground, ensuring the capital will have a full orbital overground rail service in time for the 2012 Olympics. The £75m project will create a link between Surrey Quays on the East London line and Queen's Road Peckham.
Waterloo Square Designs on Show
Proposals from the three shortlisted firms hopeful of securing the commission to design a new 'City Square' for Waterloo went on show earlier this month.
The scheme, proposed by former Mayor Ken Livingstone will include improved walking and cycling routes, a simplified transport interchange and better connections between Waterloo Station and its surroundings, as well as serving as the gateway to the South Bank and its cultural attractions.
Landlords Urged to Cover Themselves
Most standard household insurance policies are not suitable for landlords as they're not valid for property that is rented out. Landlords are usually required to take out specialist insurance which covers permanent fixtures, fittings and decorations within the property and contents protection if the property is let furnished.
Third party liability cover is often overlooked, but is an extremely valuable, low cost option to protect against claims for damage or injury made by tenants or other parties visiting your property.
Young Finance has access to a range of insurance policies specifically designed for landlords and can arrange landlord's insurance to protect your furniture, fixtures and fittings as well as third party liability cover to protect you against claims for damage or injury. Cover typically starts from as little as £10 per month.
For a no obligation quote, or further information regarding the cover available, please contact Jane Reeves at Young Finance on +44 (0)845 356 1000 or email her at jreeves@younggroup.co.uk.
Two Year Fixed Rate Residential Mortgage - Just 3.69%
This newly available market leading product provides an excellent opportunity to move from current products or standard variable rates to save money.
The mortgage market is changing frequently so feel free to contact Young Finance directly for the very latest insight and details of the currently available 'best buy' mortgage products from right across the whole market.
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Imminent Completion for Ability Place
Young Group investors who have purchased property at Ability Place will shortly be completing on their apartments. Young London is already promoting the development to potential tenants in advance of completion and clients' Portfolio Managers are liaising with the developer regarding the final schedule for completion.
London Update Feedback and Comments
We'd very much like to hear your views and feedback regarding our monthly London Update newsletter. If you have any comments or suggestions for future themes, please feel free to email moakes@younggroup.co.uk. If would like to respond to any of the items, your comments could be featured in a future issue.
Young Group specialises in providing Property Portfolio Management services to private investors; offering the best off-plan direct investment opportunities in London, as well as access to indirect, development fund investment opportunities through its development arm, Young Property. Young Group manages the entire investment process. For direct investments this spans from sourcing the opportunities through to financing, furnishing and letting.
Young Group owns all the property that it sells, and also retains a number of units in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion and has transacted in excess of 1,700 apartments, with a retail value of £700 million. The Group’s lettings division, Young Lettings, has successfully let the majority of investors’ apartments shortly after completion.
Young Group supports NORWOOD and CHILDREN with LEUKAEMIA, two charities particularly close to our heart, donating £50 per property exchange.
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